What is inflation — and who decides the target?
Interest rates are the price of money over time. Inflation is what happens to money's VALUE over time — and the two are locked in a permanent duel.
The shrinking unit
Inflation is a broad, sustained rise in prices — equivalently, a fall in what each euro or dollar buys. At 5% annual inflation, this year's €100 basket of groceries costs €105 next year. Nothing happened to the groceries; something happened to the measuring stick.
How it's measured
Statistical agencies track a giant shopping basket — rent, food, fuel, haircuts, phones — and publish the basket's price change as the Consumer Price Index (CPI). When headlines say "inflation was 3.2% in March," they mean the basket costs 3.2% more than it did a year earlier. One basket can't match anyone's life exactly (your personal inflation depends on what YOU buy), but a consistent basket measured the same way every month is what makes the trend readable.
Headline and core
Two versions of the basket are published every month and the news quotes both. Headline CPI is the whole basket. Core CPI leaves out food and energy, the two groups whose prices swing with harvests, wars and oil, and it is the number central banks lean on when they ask whether inflation is settling or only bouncing. A headline reading below the core reading is one economy seen twice: fuel got cheaper this year and everything else is still rising faster than the target. When a statement calls core sticky, it means the part of the basket that does not fall when oil falls has not moved.
Why the target isn't zero
Here's the surprise for most newcomers: major central banks don't aim for zero inflation. Most target about 2% per year — slow, steady, almost invisible. Why not zero? Because the opposite danger is worse: deflation — falling prices — sounds pleasant until you notice that shoppers postpone purchases ("it'll be cheaper next month"), companies' revenues shrink, wages follow, and the economy can spiral downward with the central bank nearly powerless to stop it. A small positive buffer keeps the economy safely away from that trap and leaves rates room to be cut in a crisis.
So 2%-ish inflation isn't failure — it's the design. The fights you'll watch in this course are about inflation ABOVE the design.
In the data
Inflation reaches you in two forms. The first is the monthly release, the number the news reports on the day it is published — here the US reading for August 2026:
The second is the annual series, one number per country per year, the form long histories and cross-country comparisons are built from:
They answer different questions. The monthly release is news, with a forecast to beat and a market that reacts within seconds; the annual series is history, published long after the year it measures, and good for asking what a decade did to your money. Note the 2022 row: that is the year the next lessons keep returning to.
Try it now
Find your country's latest CPI reading — your national statistics office publishes it on a fixed date each month. The US release above is a model of what to look for: the period it covers, the day it was released, and the year-on-year figure.
Compute: at 5% inflation, roughly what does €1,000 in cash buy after one year? After five (rough mental math is fine)?
One sentence: why do central banks fear deflation more than 2% inflation?